How Much Can You Borrow?

Typically, renters allot 25–30 percent of their income to rent. However, if they are paying a higher percentage, their landlords don't care, as long as the rent is paid every month.

That is not the case with mortgage lenders. They will make sure that your mortgage is no greater than what you can reasonably afford. For example, if they are willing to offer you a mortgage for $110,000 and the home you want costs $130,000, you will have to make up the difference by coming up with $20,000 for the down payment.

Ten or fifteen years ago, most lenders used the gross-annual-income formula to determine mortgage amounts. If you made $30,000 a year, you could get a mortgage loan of $60,000. Today, lenders who still use that formula — and they are mostly small, hometown institutions — allow two and one half or even three times gross annual income.

There is also the income-to-housing-costs formula. In this qualification procedure, the lender computes anticipated housing expenses and factors these into the equation as they determine the size of the loan they'll offer. These expenses include mortgage payment, real-estate taxes, fire and catastrophe insurance, and mortgage insurance, if any. To qualify with many lenders, your total monthly figure for housing expenses must not exceed 28 percent of your gross monthly income. Some lenders will go slightly higher. FHA loans will not go above 29 percent of your monthly income. Table 4.3lists the 29 percent ratio for different annual and monthly incomes.

To qualify with most lenders, your total monthly payment for housing expenses and long-term debts must not exceed 34–36 percent of your gross monthly income.

Another criterion is the formula that determines the ratio of income-to-long-term debt payments. Rather than monthly housing costs alone, all of the borrower's long-term (ten months or more) debt payments are calculated. Included are car payments, large outstanding charge-account balances, child support, and college loans.

As you work the numbers to see how much you can afford, keep in mind that a mortgage lender is not concerned with the fact that you may need a new car or are planning to return to school for graduate work or that you have no furniture to fill the home you buy. Mortgage lenders are going to look at your current financial situation to ensure their investment is protected. If you anticipate having large expenses in the near future, you will have to decide how much of your income you can commit to housing.

Table 4.3 Mortgage Qualification Worksheet

Annual Gross Income

Monthly Gross Income

29% of Gross Income

























Source: U.S. Department of Housing and Urban Development

But just a moment! Are those ratios carved in stone? Are lenders totally inflexible? Interestingly, in the last few years there has been a drift toward approving applicants with a considerably higher debt load than 36 percent. While it's becoming more common to qualify with a 40 percent debt load, some borrowers have been approved with figures as high as 50 or 60 percent, or even beyond. Borrowers with such high debt loads approved for mortgages are not irresponsible, and lenders are not reckless to grant loans to them.

Those borrowers have good credit. They pay their bills on time, and they have never maxed out their credit cards.

If you fit that profile, you might want to push the debt-ratio envelope yourself. Just be careful not to leave yourself only $50 a month to live on after your mortgage and other expenses have been paid!

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